Thursday, July 7, 2011

Rate Decisions, Employment Loom Over Markets!

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By Mike Conlon | July 7, 2011

This morning, rate policy meetings in both the EU and UK have gone as expected, with the ECB raising interest rates 25 bp and the BOE leaving rates unchanged. This illustrates the dynamic between the economies and how each Central bank is responding to both domestic and global conditions.

While the ECB may be facing the greater challenge with Greece, Portugal, et al.; the commitment to fighting inflation and providing relief to its citizens in the face of potential problems is commendable. Meanwhile, the BOE has taken the US approach and has burdened its citizens with higher prices so that the government can bail itself out of the years of bad decisions it has made.

The other side of todayâs data is employment which is a gauge of the health of economies. While initial jobless claims are expected to come in at the usual 420K, tomorrowâs NFP report will show actual job creation. Todayâs ADP employment change figures may give a clue on what to expect tomorrow.

One place creating jobs right now is Australia, whose unemployment rate of 4.9% is pretty good considering the size of the economy.

So today has started with risk appetite higher, as nothing unexpected has occurred (yet) this morning.

In the forex market:

Aussie (AUD): The Aussie is higher after the economy added 24.5K jobs vs. an expectation of 15K and the unemployment rate remained steady at 4.9%. In addition, full-time employment went up and part-time employment went down, perhaps suggesting that employers are growing more confident.

Kiwi (NZD): The Kiwi is higher on risk appetite and Iâm still trying to figure out when the postponed GDP report will be released.

Loonie (CAD): The Loonie is moving higher as oil prices and risk appetite have both increased this morning ahead of this morningâs home price index reading as well as a PMI report.

Euro (EUR): The ECB did as expected, raising interest rates .25% and German industrial production figures came in better than expected, posting a monthly gain of 1.2% vs. an expectation of .8%. If they can just figure out how to solve the debt crisis, the EU economy appears to be pretty strong. That, however, is a big âifâ.

Pound (GBP): The Pound is mixed after the BOE left rate policy unchanged, and tomorrowâs GDP estimate may be the reason why they are unwilling to fight inflation. Mixed data points also came in with industrial production figures decreasing more than expected at -.8% vs. -.5%, but with manufacturing production figures beating expectations posting 2.8% vs. 2.1%. (Click chart to enlarge)

Dollar (USD): The release of the ADP employment change has sent the markets much higher this morning as it came in much better than expected showing job gains of 157K vs. an expected 70K gain. Initial jobless claims came in slightly better than expected at 417K, but the market may be revising its predictions for tomorrowâs NFP.

Yen (JPY): The Yen is weaker across the board as risk appetite has increased thanks to the ADP jobs report. Tonight, Japanese trade balance figures should show a larger deficit as the supply chain disruptions have affected exports.

The ECB is proving that the show can go on with higher interest rates despite the looming debt problems they have in the region. While it is unfortunate that they and Euro zone leaders did not handle the Greek debt crisis as well as they could have given the time they had, if they can come up with a viable solution, the EU economy looks pretty good right here.

Contrast that with the US economy, where the Fed is absolutely terrified of raising rates and is content to let citizens suffer through inflation. While todayâs ADP report is highly encouraging, we have a long way to go here in the US to return to financial health.

Extremely accommodative monetary policy has to end soon and the business climate must change in order to get things moving again. We have to return to normalized conditions so that businesses can plan for the immediate future and not be afraid of government policy decisions that may be driven by the whims of the populace and whatever feels good today.

Tomorrowâs NFP report will be a big one if a number like todayâs ADP is produced. Expectations have been low so far and the public perception of government is near an all-time low. The debt ceiling debate is just one hurdle in a series that needs to be overcome, but the road to recovery is through employment gains and politicians should be doing everything they can to encourage and not hinder it.

But for now, continue to invest in those countries that are showing strength, by selling those that exhibit weakness!

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